Bulgaria rethinks energy policy

October 17, 2013 | 00:00

The political ties between Russia and Bulgaria run deep. During Soviet times, Bulgaria was one of Russia's closest political allies. This important place of Russian influence in Bulgarian politics persists today as each government seeks to (re)define its relationship with the Kremlin. The transition into democracy in 1989 significantly reshaped r...

Bulgaria rethinks energy policy

By Luka Oreskovic

The political ties between Russia and Bulgaria run deep. During Soviet times, Bulgaria was one of Russia's closest political allies. This important place of Russian influence in Bulgarian politics persists today as each government seeks to (re)define its relationship with the Kremlin. The transition into democracy in 1989 significantly reshaped relations between the two countries as Bulgaria pursued a new western course, joining the NATO in 2004 and the European Union in 2007. On the surface, this substantial rapprochement with ‘the West’ reduced Russia’s influence over the 7,3 million population of this Balkan country. Yet in energy policy ties still run deep.

To be built or not to be built, that's Belene(c) novinite.com

Like most Eastern European countries, Bulgaria used to import the majority of its natural gas from Russia’s Gazprom. Bulgaria’s only nuclear power plant, in the city of Kozloduy, is Soviet-built. Its biggest oil refinery is owned by Lukoil. Russia’s influence abounds in Bulgaria’s energy sector.

This is well illustrated by former president Georgi Parvanov, who signed for an energy policy "Grand slam" in 2009. Bulgaria would agree to cooperate with Russia on three major projects: the development of a nuclear power plant in the city of Belene, an oil pipeline between Bulgaria and Greece, and the Gazprom-led South Stream gas pipeline. The Gazprom-led USD21 billion South Stream pipeline project, arguably the most important part of the “Grand slam”, got under way last year when the construction agreement on Bulgaria’s section of the pipeline was signed in addition to those in Serbia, Hungary and Croatia.

Soon thereafter this Russian-Bulgaria energy partnership came to a sudden halt. Under prime minister Boyko Borisov Bulgaria's center-right administration dropped plans to develop the nuclear plant and the oil pipeline. It was an effort to diversify the country's energy sector away from Russia. The development of the South Stream pipeline, however, continued.

Changing governmental policies

Energy supply and prices turned out to be a breaking point for the Borisov government. At the beginning of this year, hundreds assembled in violent protests against steeply rising electricity and heating bills. A long winter and a 14 percent rise in electricity prices since last summer put pressure on many low-income Bulgarian households. Protests also put pressure on and called for expulsion of three foreign-owned power distributors in Bulgaria, Czech CEZ and Energo-Pro, and Austrian EVN. After drawn-out protests and speculations about the government nationalizing the utilities – motivated by an example from Albania where the same Czech CEZ was stripped of its distributor license – the Borisov government resigned and lost its mandate in the subsequent elections earlier this year.

The fall of Borisov's government and Bulgaria's new Socialist-led government under the new prime minister, Plamen Oresharski, revived all Russian-Bulgarian energy cooperation topics. While the South Stream pipeline’s future was set, restarting the halted construction of the multibillion-dollar Belene nuclear power plant was being considered.

Plamen Oresharski’s professional and political background impact the question to what extent the new Socialist government in Bulgaria would revive energy cooperation with Russia. Oresharski was a finance minister of the Socialist-led government between 2005 and 2009, when the ‘Grand slam’ agreement was signed with Russian counterparts.

Full resumption of the ‘Grand slam’ seems unlikely. However, while Oresharski has been skeptical about the Greek-Bulgarian oil pipeline, the Belene nuclear power plant project may well be restarted. It would not be a first.

Plamen Oresharski argued that the Belene nuclear power plant might be finished for economic rather than political reasons

Ever since its start-up in the early 1980s, the Belene project has been put on hold and restarted several times. When a construction contract was finally signed with Russia’s Atomstroyexport in 2008, the project’s prospects seemed to improve. Only a year later Germany’s RWE withdrew as strategic investor and the project was put on hold again. Rising costs and the global financial crisis contributed to this decision.

The halt of the Belene project prompted Atomstroyexport to file for a 1 billion euro claim against the Government for services already performed. Shortly thereafter, the Socialist party put forward a referendum on the nuclear power plant in January of 2013. Insufficient turnout rendered the referendum results invalid. The outgoing Parliament decided to call off the project’s development in February of this year.

Politics and regional connections

A new parliament and Socialist government shed a new light on the project. Plamen Oresharski argued that the Belene nuclear power plant might be finished for economic rather than political reasons. However, the economic feasibility of Belene has been questioned by many.

Throughout the first two quarters of this year, substantial surpluses in energy production were registered in the country. They prompted temporary production suspensions in several Bulgarian power plants. On top of that, the estimated 10 billion euros needed to complete the Belene power plant would make electricity prices largely uncompetitive. Even so, the questionable economic rationale for Belene might not stop its construction in the end.

Rosatom’s strategy to get Belene’s construction resumed is no secret, yet it remains effective. Filing large compensation claims and offering to drop them if the project is restarted put pressure on the Bulgarian government to finish the project after all. Add to that the lobby of industry-affiliated circles in the Socialist party, and a third restart of the project does not seem unlikely.

The third part of the ‘Grand slam’ – a pipeline between Burgas and Alexandroupolis - remains unlikely. Signed in 2007 by Vladimir Putin and the Prime Ministers of Greece and Bulgaria,

For the next few years, the South Stream pipeline holds the best cards in this energy ‘Grand slam’

Sergey Stanishev and Kostas Karamanlis, the project was a proposed hub for Russian and Caspian oil transported in the Bulgarian Black sea port of Burgas through to the Greece Alexandroupolis port. Once the Stanishev government was replaced by Borisov, the pipeline project was suspended following environmental studies that predicted a negative impact on the environment and tourism in the Burgas region.

Of all three ‘Grand slam’ projects, the Burgas-Alexandroupolis pipeline’s restart may be the hardest to execute - despite a new Bulgarian government that is more likely to cooperate with Russian partners. The project’s substantial impact on the environment has raised serious concerns. And as Russian investors are looking for alternative routes, this reduces the focus on the Burgas project. The fact that the Greek oil sector is struggling does not help either. Prime minister Oresharski has stated that the Burgas- Alexandroupolis pipeline remains off the government’s energy policy agenda.

For the next few years, the South Stream pipeline holds the best cards in this energy ‘Grand slam’. While locally the project had a fairly smooth start, the macro-perspective remains blurred: slowed down by Brussels-Moscow negotiations and talk of probes, overall the project is considered an economically unfeasible political affair. While the South Stream might not amount to much economic sense for its founder, the Russian government and state-owned Gazprom, the project’s Bulgarian section proved a valuable tool for the Bulgarian government. Last year Bulgaria managed to negotiate a twenty percent reduction of natural gas prices as a condition for pursuing South Stream. So far the project is likely to remain on track.

While the Bulgarian government’s policy turn towards Russia is surely welcomed by the Kremlin, Gazprom’s focus on the Eastern European market is decreasing amid broader regulatory and economic challenges. At the same time the development pace of South Stream in Serbia will also impact the schedule for the Bulgarian section. Consequently, Bulgaria’s rapprochement with Russian energy interests may well increase the pressure to restart the Belene project. At the same time Gazprom is struggling with its internal issues, rethinking its market focus.

Luka Oreskovic is a researcher and associate of the Institute for Quantitative Social Science at Harvard University and a columnist or contributor to the Financial Times, the Economist, Moscow Times and Huffington Post.